Many California homeowners are facing significant tax bills when selling properties due to an outdated federal capital gains exclusion set in 1997. Most homeowners have built equity exceeding the $250,000 limit for individuals and $500,000 for couples. National home values have surged over 260% since the rule was established, meaning many sellers now owe taxes as gains surpass the exclusion limits. Additionally, California imposes high taxes on gains as ordinary income, leading to substantial tax burdens for many sellers across various markets.
The federal capital gains exclusion was created in 1997 to simplify real estate taxes. It allows homeowners to exclude $250,000 in profit ($500,000 for married couples) when selling their primary residence.
National home values have increased by more than 260%. If the caps had kept up, they'd now be more than $660,000 for individuals and $1.32 million for couples.
Sellers not only face federal capital gains taxes, but California also taxes gains as ordinary income, with rates as high as 13.3%. That means the combined tax burden for some sellers can easily reach into six figures.
California's exposure isn't limited to luxury markets. The state's 62.2% over-exemption rate is among the highest in the country.
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